Question

-Do you work for a large firm or know someone who does? How could you find their financing mix? What are some red flags you should be on the lookout for?
-Have you heard of any accounts of workers losing their jobs due to their firm going out of business? Are there any financial or management lessons which could be learned from their failure?
-Do you think there are advantages to issuing more debt? Why or why not?
-If you were to open your very own new business currently what kind of financing mix would you prefer and why?

Answer 1

• Finanacing mix or capital structure is the mix of long-term debt, on which interest and principal payments must be made, and equity, in the form of common and preferred stock, which the firm uses to finanace operation. We can find the financial mix by using  three ratios to assess the strength of a company's capitalization structure. The first two are popular metrics: the debt ratio (total debt to total assets) and the debt-to-equity (D/E) ratio (total debt to total shareholders' equity). Increase in issue of debt may indicate that the firm is more highly leveraged, and there is a higher risk of bankruptcy. Increases in the total equity may negatively impact existing shareholders since it usually results in share dilution. That means each existing share represents a smaller percentage of ownership, making the shares less valuable.

• A lot of workers lost their job because of firm going out of business. Many companies use a reorganization of business affairs, its debts, and its assets. A good company should contain the mix of debt and equity. Debt decreases the tax liability of a firm because it is an expense.

• Debenture is a liability and an obligation. If a company incurs any loss then it becomes a burden and also increase in issue of debt increases the financial risk of a company because it increases financial leverage.

• Financial mix of debt and equity financing that maximizes a company’s market value while minimizing its cost of capital. Debt financing offers the lowest cost of capital due to its tax deductibility. However, too much debt increases the financial risk to shareholders and the return on equity that they require. Thus, you have to find the optimal point at which the marginal benefit of debt equals the marginal cost.